13 January 2009
i a person get 20000 for his capital asset as advanc and later(after 2 ) for computation of capital gain can indexation be applied for advanc received.
18 July 2024
No, indexation cannot be applied to advance received for a capital asset when computing capital gains. Here’s why:
1. **Indexation Benefit:** Indexation is a method allowed under the Income Tax Act (Section 48) in India to adjust the cost of acquisition of a capital asset based on inflation. This adjustment helps in reducing the tax liability by increasing the cost of acquisition to account for inflation over the holding period of the asset.
2. **Applicability of Indexation:** Indexation benefit is applicable to the actual cost of acquisition of the asset, which includes the amount paid for acquiring the asset and any costs directly related to the acquisition, but not to advance payments.
3. **Advance Payment:** When an advance payment is received for a capital asset, it represents a commitment or a part-payment towards the acquisition of the asset. However, until the asset is actually acquired and the full consideration is paid, the indexation benefit does not apply.
4. **Capital Gains Computation:** For the purpose of computing capital gains: - The cost of acquisition for indexation purposes will typically include the actual amount paid towards acquiring the asset, any incidental expenses directly related to the acquisition, and improvements to the asset. - The advance payment received may be treated as part of the consideration received when the asset is eventually sold, but indexation cannot be applied to this advance amount.
5. **Tax Treatment:** The tax implications for advance payments vary based on when the advance was received, the terms of the agreement, and when the asset is transferred. Typically, the tax liability arises when the asset is transferred and the full consideration (including any advance payments) is received.
In conclusion, advance payments received for a capital asset do not qualify for indexation benefit. Indexation applies only to the actual cost of acquisition of the asset, which includes payments made towards the acquisition after considering specific provisions of the Income Tax Act.
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